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Cost benefit analysis on establishing a machinery hiring-out centre in Sri Lanka

Authors:

K. G. C. D. B. Wijesinghe ,

Department of Agriculture, Peradeniya, LK
About K. G. C. D. B.
Socioeconomics and Planning Centre
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G. L. Nagahawaththa,

Department of Agriculture, Peradeniya, LK
About G. L.
Socioeconomics and Planning Centre
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R. B. T. M. Radeniya,

Department of Agriculture, Peradeniya, LK
About R. B. T. M.
Socioeconomics and Planning Centre
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D. M. B. Priyadarshani

Department of Agriculture, Peradeniya, LK
About D. M. B.
Socioeconomics and Planning Centre
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Abstract

Reduction of labour is one of the major concerns in the recent past in the agriculture sector of Sri Lanka recent past. Agriculture has become less attractive to youth. Even though mechanization will be one of the better solution to overcome this problem, high cost of capital requirement restricts small land owners to move into mechanization. The Department of Agriculture (DOA) has identified this issue and proposed to establish machinery hiring-out centres to enable the farmers to obtain services at a reasonable rate. This study aimed at estimating the financial feasibility and economic feasibility of hiring-out centres over the project economic life of 10 years. Financial feasibility analysis included financial statement analysis, net project worth assessment and sensitivity analysis. For the purpose of economic analysis, financial prices were converted to shadow prices using the shadow exchange rates and project worth was recalculated. In project analysis, it is common to have multiple IRR rates, which was answered with MIRR estimation representing the actual IRR. Results of the study revealed that the project is financially viable and generates positive net income of Rs. 27 million annually throughout the period, generation of net cash inflow of Rs. 257.7 million, and accumulation of net assets of Rs. 277.7 million. Project worth analysis resulted in a positive financial NPV of Rs. 7.6 million, IRR of 19%, MIRR of 13% and a B/C ratio of 1.03. However, the IRR value and B/C ratio is contradictory to each other due to multiple IRR values and limited time frame of analysis of 10 years and this was addressed through MIRR measure, which is the optimal IRR value of the project and is consistent with the B/C ratio. Economic feasibility analysis showed a positive ENPV of Rs. 10.1 million, EIRR of 28%, EMIRR of 18% and a B/C ratio of 1.05. The study concluded that establishment of a machinery hiring-out centre is feasible at financial and economic conditions in a minimal risk environment. Consequently, government may have a role in facilitating the project implementation with suitable subsidy scheme till the project maturity. Development of a suitable implementation design would be the next step such as a PPP model.
How to Cite: Wijesinghe, K.G.C.D.B., Nagahawaththa, G.L., Radeniya, R.B.T.M. and Priyadarshani, D.M.B., 2019. Cost benefit analysis on establishing a machinery hiring-out centre in Sri Lanka. Sri Lanka Journal of Food and Agriculture, 5(2), pp.33–45. DOI: http://doi.org/10.4038/sljfa.v5i2.75
Published on 29 Dec 2019.
Peer Reviewed

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